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SUMMIT NATL. LIFE INS. CO. v. CARGILL

April 20, 1992

SUMMIT NATIONAL LIFE INSURANCE COMPANY
v.
CARGILL, INCORPORATED



The opinion of the court was delivered by: THOMAS N. O'NEILL, JR.

MEMORANDUM

 O'Neill, J.

 April 20, 1992

 I. Introduction

 This is a diversity action. Defendant Cargill, formerly the sole shareholder of plaintiff Summit, sold all of the issued and outstanding stock of Summit to SNL (formerly Virick Limited II) in 1988. Summit brought this action against defendant alleging the breach of a Tax Allocation Agreement that had been entered into by Summit and Cargill on or about July 13, 1983. Cargill moved for summary judgment on the grounds that (1) plaintiff's action was barred by Bangor Punta Operations, Inc. v. Bangor & Aroostook Railroad Co., 417 U.S. 703, 41 L. Ed. 2d 418 , 94 S. Ct. 2578 (1974) and (2) that the Tax Allocation Agreement was settled prior to the sale of Summit. I referred both motions to Magistrate Judge M. Faith Angell for Report and Recommendation which she has submitted. The Report recommends that summary judgment be entered in favor of Cargill. Summit has filed lengthy objections to the report which Cargill has answered. *fn1"

 I have reviewed the Magistrate's Report and Recommendation and the parties' submissions. For the reasons set forth below, I will approve the Report to the extent that it is consistent with this Memorandum and adopt the Recommendation that judgment be entered against Summit.

 II. Discussion.

 The parties do not contest most of the Report's recitation of the facts and therefore a brief summary is sufficient. In late 1981 and early 1982, while a wholly-owned subsidiary of Cargill, Summit generated significant tax deductions by making a one-time election under 818(c) of the Internal Revenue Code to revalue its life insurance reserves using $ 19/1000 reserve level for its graded premium ordinary life insurance policies. On or about July 13, 1983, Summit and Cargill entered into a federal tax payment allocation agreement, under which Cargill agreed to compensate Summit for the tax benefits it conferred on Cargill. Separately, the parties agreed to file a consolidated return for each of the fiscal years ending May 31, 1983 and subsequent. See Report at 2 and n. 5.

 Cargill used tax deductions produced by Summit's 818(c) election, calculated at $ 19/1000, for the years ending May 31, 1984 through May 31, 1987. Under the formula set forth in the Tax Allocation Agreement, Cargill's total benefit for the tax years 1983 to 1987 was $ 131,388,504.00. For the calendar years 1983 through 1987, Summit recognized $ 47,239,127.00 as income from Cargill under the tax agreement. This amount is the value of deductions generated by Summit using a reserve level of $ 5/1000.

 On or about December 30, 1987, Summit transferred $ 84,149,377.00 to Cargill by means of an interdepartmental voucher. This sum represents the difference between the total financial benefit to Cargill resulting from Summit's 818(c) deductions at the $ 19/1000 level and the tax refund paid to Summit by Cargill using a reserve level of $ 5/1000. On or about June 29, 1988, Summit and Cargill executed a Termination Agreement to terminate the Tax Allocation Agreement. Cargill sold all of the issued and outstanding stock of Summit to SNL for $ 52,000,000.00 in October 1988.

 A. Settlement of the Tax Allocation Agreement

 The Report and Recommendation relies on affidavits submitted by Cargill to conclude that "officers of Summit and Cargill, claiming proper authorization, agreed to settle their obligations under the Tax Allocation Agreement prior to the sale of Summit." Report at 18. *fn2" Summit concedes that the Report "accurately recites . . . the factual history of the transfer of monies from Summit to Cargill through the use of an Interdepartmental Voucher" but argues that the Report usurped the jury's function by concluding that Summit's transfer of $ 84,149,377.00 constituted a settlement of the Tax Allocation Agreement. Summit National Life Insurance Company's Objections to the Report and Recommendation at 4-6.

 The parties stipulated that there is no written agreement which purports to settle obligations owing under the Tax Allocation Agreement and that the Termination Agreement does not specifically provide for release or forgiveness of the tax allocation agreement. Stipulation of Undisputed Material Facts Nos. 18, 21. The parties also stipulated that Summit's Board of Directors did not pass resolutions authorizing a settlement, release or termination of the Tax Allocation Agreement. Stipulation No. 25. Nor did Summit's Board specifically authorize the Summit representatives involved in the transfer to settle or compromise any amounts due Summit under the agreement. Stipulation No. 14.

 Summit contends that in the absence of written evidence of a settlement, any alleged settlement must be the result of an oral modification to the Tax Allocation Agreement. Summit relies on Barnhart v. Dollar Rent a Car Systems, Inc., 595 F.2d 914 (3d Cir. 1979), in which the Court of Appeals for the Third Circuit, construing Pennsylvania law, held that "'where there is a dispute as to which set of several circumstances, some expressed in writing and some oral, constitute the agreement between the parties it is the jury's function and not the court's to determine which set of circumstances constitutes the true agreement.'" Id. at 918 (quoting Gilbert v. Safeguard Mutual Insurance Co., 345 F.Supp. 732, 734 (E.D.Pa. 1972), aff'd., 481 F.2d 1398 (3d Cir. 1973)). The Court held that the "allegation of an oral modification or waiver of the written condition precedent was sufficient to convert the interpretation of the true agreement into a question of fact." Id.; see also First National Bank v. Martenies, 1989 Ohio App. LEXIS 3736 (Ohio App. Sept. 29, 1989) (question of whether contract has been modified hinges upon intent of parties and is decided by the factfinder).

 In its responsive submissions, Cargill does not attempt to address Summit's objection that the issue of whether the Tax Allocation Agreement was orally modified should be determined by the factfinder. Rather, Cargill argues that Summit has not presented any evidence to contradict the evidence submitted by Cargill establishing that the intercompany accounts related to the tax agreement were finally settled prior to the closing. Defendant Cargill Incorporated's Response to Plaintiff's Objections at 6. Summit has not submitted affidavits containing assertions of its intent in making the transfer to Cargill but points out that there is no evidence of the corporation's intent to settle, e.g., minutes of Summit's Board of Directors. Cargill contends that there was no need for a written settlement between Summit and Cargill because Bangor Punta holds that a parent corporation is free to control its wholly-owned subsidiary's assets and dispose of them as it sees fit since any injury to the wholly owned subsidiary is actually an injury to the parent. Defendant Cargill's Response to plaintiff's Objections at 6. Under Barnhart and First National Bank of Toledo, the ...


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